A bankruptcy judge would take over all decisions regarding the Stockton's debts

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Stockton became the nation's largest city to seek federal bankruptcy protection Tuesday night after the city failed to reach finance agreements with creditors to address a $26 million budget shortfall.

"Unfortunately we have no comprehensive set of agreements with our creditors that would eliminate the deficit and avoid insolvency,'' Deis said at the City Council meeting Tuesday night. "We think Chapter 9 protection is the only choice left."

The city is still in negotiations with some creditors, he added. Officials might reach deals with up to one-third of the creditors, Deis said.

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"If we get any agreements, those will be honored in Chapter 9," Deis said.

Stockton is the seventh municipality to file for bankruptcy this year and the first California city since Vallejo in 2008. Since Congress added Chapter 9 to the bankruptcy code in 1937 to allow municipalities to seek protection, about 640 government entities have filed.

Last year's 13 filings almost doubled the six filed in 2010. That was the most since an equal number were filed in 1994.

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By comparison, about 1.5 million Americans file for personal bankruptcy per year and about 50,000 companies file for business bankruptcy, according to the Associated Press.

"This is the most difficult and heart-wrenching decision that we have ever been faced with,” said Mayor Ann Johnston. "We must take this action to protect the health, safety and welfare of the entire City and begin the recovery process."

Under bankruptcy protection, officials would retain power over day-to-day city operations and staffing, but a judge would take over all decisions concerning the city's debts, said Robert Benedetti, professor of political science at the University of the Pacific in Stockton.

The judge would decide which creditors should be paid, how much and in what order. He would make allowances for expenditures needed by the city to function, and it would be up to city officials to decide how to spend that money.

Stockton's Path to Bankruptcy Filing

The city has been hit hard by high crime and the collapse of the housing market in the past three years. It's also dealt with $90 million in deficits through a series of drastic cuts.

The new budget did not call for additional service cuts beyond those that earlier slashed the police force by one-fourth, the fire department by one-third and 40 percent of other city employees, along with wages and medical benefits.

The budget approved Tuesday night would suspend payments for debts and legal claims; reduce payments for retiree medical benefits; further cut some pay and benefits; and increase revenue through code enforcement and parking citations.

In recent years, thousands of new homes were built in Stockton. When the economy crashed and the construction bubble burst, Stockton was battered by foreclosures and lost income from property taxes and other fees.